Financial Plan - 2

Name: Shantanu, 31 Manjari, 27

Resides in: Pune

Profession: Shantanu is a lecturer in PU, and Manjari is pursuing a PhD

Net annual income - (Rs 7.34 lakh)

Status & goals

Their key goals are planning for the future of their child (yet to be born), buying their own home and also adequate income after retirement. Currently they do not have much investment and almost all their savings are lying in bank fixed deposits and saving bank account.

Needed

A financial plan that can help them channelise their savings towards their goals

Net monthly surplus - Rs 44,000

Current investments

Savings Bank Balance- Rs 40,000

Fixed deposits - Rs 1 lakh, PPF- Rs 20,000

Findings

Emergency Fund - Rs 40,000 is available in savings bank account for contingency. This can take care of 2 months of regular expenses.

Health insurance - Rs 1 lakh from Shantanu's institute covering the family and family floater cover of Rs 3 lakh covering both of them.

Life Insurance - Shantanu has combined insurance cover of Rs 5.10 lakh from 3 LIC policies where as wife Manjari has insurance cover of Rs 50,000 from TATA AIG.

Investment Asset Allocation - All their monthly investments are lying in safe investment vehicle, thus compromising on growth aspect.

Recommendations

Emergency Fund

Increase saving account balance to Rs 85,000 as emergency fund, which will cover 5 months of regular expenses in any adverse situation. Additionally Rs 4,500 per month should be put in a recurring deposit account to pay for future maternity expenses. The same amount will be used for the increased monthly cost after the child is born.

Express Tip: Don't keep more than 3-6 months of expenses in ready to use form for emergency fund. Excess amount lying there will hamper long-term growth of overall portfolio.

Health Insurance

During renewal they should consider converting their existing family floater cover of Rs 3 lakh to individual cover for both of them. This should cost around Rs 7,600 per annum. Shantanu should also consider taking individual health for his parents of Rs 2 lakh each costing around Rs 21,200 per annum.

Express Tip: Relying on Employer provided insurance completely can be risky, especially at a higher age.

Life Insurance

Shantanu and Manjari should discontinue their respective endowment and money back plan. A term insurance of R 60 lakh and R 28 lakh is recommended for Shantanu and Manjari respectively. They should go for an online policy which offers low premium. However they need to review their insurance needs upon birth of their first child and taking house loan.

Express Tip: Segregate insurance and investment needs. Insurance is meant for family protection. Capital growth can be compromised due to high charge structure.

Child education and marriage

Current income is not enough to allow for any saving towards this goal.

Express Tip: In the absence of adequate income, planning for lower priority goals can wait till an increase in income or a windfall gain such as an bonus or an inheritance.

Retirement

The inflation linked corpus required for them will be Rs 2.60 crore. To accumulate the said corpus they require investment of Rs 2,700 per month in good diversified equity mutual fund and Rs 500 in a gold mutual fund.

Express Tip: This should be considered as most important goal.

House Purchase

In order to accumulate corpus of Rs 44 lakh towards down payment (40%) of house purchase in next 7 years and then afford the EMI for the balance amount of loan, they require monthly investment of Rs 33,500 in a MF.

Express Tip: Own house purchase is a very important goal that requires proper and thoughtful planning. Be focused and keep saving and investing.

Car Purchase

The current income is not enough to allow for any saving towards this goal. The existing fixed deposit of Rs 1 lakh can be kept towards the down payment of the car should the income in future allow for a car loan.

Existing Investments

Continue with their existing investments in MF schemes and PPF. However, there should be higher allocation towards equity for their long term goals. Exit Endowment and Money Back plans as they do not meet your insurance objective. Instead go for online term plan.

Conclusion

It is important that you follow the recommendations diligently and be patient with your investments to bear fruit. Follow asset allocation, make provisions for the emergencies and review your Financial Plan periodically.

Source – Indian Express

Financial Planning – A Journey

Team CrawFin/ Harshal Jawale, CFP^CM

Financial planning is about planning your money to achieve your goals within a given timeframe. Goals can be different for different people at different times, and you can't achieve these goals without financial planning.

The only problem is that many individuals do not take financial planning seriously and tend to act as they come. Once they know which fund or investment avenue to deposit their money into, they consider their financial planning is over. This indeed is a very big blunder. I wish financial planning was that simple by doing a few simple investments and your goals would be met. But the path towards our goal is never that easy, any goal for that matter.  There are steps to follow which help you achieve your goals.

Let us have a look at the broad steps of financial planning.

1.      Contingency planning

2.      Insurance planning

3.      Investment planning

4.      Retirement planning

The first two steps: contingency planning and insurance planning is known as risk management. Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning. 

Contingency planning

Emergencies can come anytime or anyplace, we cannot predict or at times even prevent it.  

All your mandatory monthly expenses which you have to meet anyhow should be considered. They are all types of loan, premiums of various insurance, Grocery, Utility bills and other miscellaneous expenses. It is always better to calculate them for yearly basis to arrive at appropriate average.

At least three months of your average monthly expenses have to be kept aside in the form of emergency funds. Higher age or higher number of dependant then you should keep cover for more months.

It is equally important to keep emergency funds into liquid and risk free investment vehicles. One may consider a combination of cash, fixed deposit or liquid funds for the same.

Insurance planning

You may think that you are adequately insured but please note your insurance planning is not only planning for your life but also for health and property.  I have seen many people buying ULIP at the age nearing to retirement, or agents approaching housewives to buy Life Insurance. They don’t even realise that they do not require life insurance anyways since their family members are not financially dependent on them.

Never buy insurance just because your agent advises you to buy. Try and understand the product, correlate it with your needs and requirements and only then go for it. It is very important to know that, Insurance is not investment. Insurance is for risk management and investments are for goal achievements.

So how much is adequate? A number of components go into the calculations in finding the adequate amount of life insurance. Age and Number of dependants form the most pie of consideration. Safely one can assume a cover of 10 years expenses or 4 years income whichever is higher is adequate cover enough. This ensures your dependant to have few years in hand to become independent.

In case of health insurance minimum amount of Rs 2 lakh is a must. For family floater cover should be increased appropriately. It is very important to pay your insurance premium on time and see that it does not lapse.

Especially for individuals who are nearing retirement must buy health insurance from outside. Today you are working and have health cover by company, but at 58 when you retire that cover will not be available; irony is this is the age when you need it the most. Most good health insurance policies allow entry till age 55. So it is very important to get yourself insured towards health before 55.

Your hard earned money has gone in setting up your house. If something were to happen to it then it is difficult to replace. So it is always advisable to have your property insured. The premium amount is low.

Investment planning

Save money and earn returns!

If the investments are not invested in right avenues then you would face either lock-in or low liquidity. Hence to achieve your goal it is not only important to grow your money but with appropriate risk level and withdrawal option.

One should be very clear about the goals and the time frame. Most important is goals should be realistic enough, neither too high nor too low. One may break down goals into 3 categories of –

Responsibility = Dependent Parents, Child’s Education/Marriage etc

Need = Buying a House, Saving for Retirement etc.

Dream = Buying a Car, Going on World Tour etc.

It is also critical to wrap it in timeframe. You cannot put aside equal amount of money for buying a house and saving for retirement at same timeframe. Buying house must be achieved much earlier and once achieved stretch must be given to retirement planning.

Then your investment products should be selected on the basis of the time frame within which you would like to achieve the goal. Once your goals and time frame is in place you need to be clear on amount that you would like to spend for that particular goal at today's value. After considering inflation, is the amount you will have to spend. Keep in mind that real inflation in case of our goal is much higher than total inflation declared by government every Thursday. It is safe to assume 8% inflation while calculating the amount required at any future date.

Future value = Present Value * (1 + inflation rate) ^ Number of years left to achieve your goals.

Retirement planning

Good news is because of medical advancement you are likely to live longer, bad news is you must make yourself independent for those extra non earning years. It should also be noted that unlike old times when families were living jointly, now is the era of nuclear family; hence one should not rely on children financially.

Inflation here too plays a spoilsport and increases cost day by day. Fortunately Government has been supportive by providing tax incentives for post retirement earning.

Retirement planning is not only about taking pension policy or contributing to PF account. Today when one jumps on better opportunities, it is also important to note that by job hoping you loses out with gratuity and superannuation.

While agents tell you that it is always better to start early for retirement planning, they forget to mention that retirement planning does not end at 58. In fact in my view retirement planning actually starts at age 58. When you have huge corpus accumulated over the life in hand and do not willing to take risks. It is difficult to deploy this huge amount without any risk and generate return at inflation pace. Remember investment should be safe enough because at this age you definitely not in a position to earn again if anything happen to it.

Keeping it Simple & Silly: Portfolio building using MF

Team CrawFin/ Harshal Jawale CFP^CM

All of us work hard to earn money, save a little by the end of day. Yet trouble doesn’t end here now we want someone specialist who can manage our savings for the future needs. Finding financial advisor itself is a task these days, we want the best money manager but without any charges.

Mutual Funds offer such facility at very little charge if not free. Fund manager is an appointed expert by AMC who manages money collected from thousands of investors like us and invests into asset classes like Equity/ Gold/ Bonds etc.

Large/Mid/Small cap funds =

Approx 50-60% of the money may be invested into these funds. A systematic investment on regular basis is the best approach advisable. Where large caps provide stability to portfolio small caps provide superior returns over longer period of time.

Tax saver MFs can be termed into large cap funds for allocation purpose.

Sectoral Funds =

Approx. 20% of the money may be invested into these funds. Banking/IT/Pharma/Media/FMCG/Infra etc options are available in the market. These funds are used to provide trading returns to the portfolio and hence are short term in nature, typically 6-12 months. It depends upon market condition and is risky in nature and hence require informed decision making.

Gold Funds =

If you are more worried about charges while investing then Gold fund is a must buy for you. According to my estimate it saves more than 5% of charges as against physical purchase of Jewellary/coins/bars. Buying Gold ETF into smaller quantities is preferred with time duration of more than one year. Approx 10-15% of the portfolio can be invested into Gold.

Debt Funds =

If you have idle money but don’t want to go for fix deposits in order to keep it liquid or worried about tax liability on interest on fixed deposit then debt funds/FMP are the best options for you. It may be short term/long term in nature. Allocation to these funds should be increased as the age increases.

One may follow following distribution of wealth into various assets using MFs

• Large Cap - 30%
• Mid Cap - 20%
• Small Cap - 10%
• Sector 1 - 10%
• Sector 2 - 10%
• Gold - 10%
• Debt - 10%

Allocation of funds may vary depending upon individual risk, earnings and needs. Above broad based allocation is given to provide general idea of how one can build portfolio and take exposure to various assets using MFs.

Trouble still doesn’t end here, there are 30+ Funds with 1000+ schemes to choose from, you may need financial advisor to take informed decision on selecting MF schemes and keep monitoring them. Do not forget to check his/her credentials to advise you, mere designation provided by broker/banks/MFs cannot be trusted when you put your money. Independent advisors too opt for higher commissions compromising on your needs and still require your verification of his/her credentials.

Technical Analysis - Intro

Team CrawFin/ Harshal Jawale, CFP^CM

Technical analysis is usually followed by traders to catch short term movements in the financial markets. Focus is on supply and demand of asset class i.e. more the supply of shares price will move lower and vice versa.

Let us take a real life recent example of Gold to explain the logic behind.

Gold moved up from 2300/gm to 2900/gm (July 2011 to Mid Aug 2011)

Gold accumulated at 2000-2200 level for almost 7 months and rise in price was due on cards as economic situation in west was in stress. While almost everyone missed the rally in Gold was talking about frenzy rise to continue. My obvious question was “Who would buy gold at 3000/gm after seeing such phenomenal rise in short time?” Besides it was a time for those who accumulated gold over many months to book profits. So there will be more supply of gold in the market while there will be lesser number of buyers, result expected price will fall.

Gold consolidated at 2800-2900/gm (Mid Aug – Mid Sept 2011)

We saw why I should not be buying gold but about booking profits at 2900 level, easy to say but how would one decide whether 2900 is the right level. What if Gold continues its rally? Is another difficult scenario needs to address. In such times it is always better to wait for consolidation to happen to take any buy/sell decision. As you can see Gold consolidated for enough time for us to realize that 2900 is the level where supply has clearly overtaken demand. So it was right time to sell and wait for buy.

Gold seen fall from 2900/gm to 2600/gm (Since Mid Sept)

As we can see gold prices have fallen from 2900, meaning whoever was ready to buy gold at 2900 have already bought and supply pressure still exists. Where will this fall stop? Nobody knows. At some time the situation will arise where there will be more buyers than sellers. Say 2500/gm is the price where seller feels gold has fallen too much i.e. from 2900 to 2500 so he should not sell rather wait for higher price to come, similarly buyer would feel that gold will not fall too much from here. But will 2500 will be the price is something very difficult to identify, so right approach would be accumulate gold in smaller quantities.

Technical Analysis follows trend, very important criterion for this to apply is everything else should remain more or less same. Any fundamental news would mean supply-demand ratio to go for toss, hence it is most important to put stop loss so that your losses are arrested at comfortable level.

Technical Analysis experts apply tons of tools to determine trend, some of them are as follows

1. Elliot Wave
2. Japanese Candlesticks
3. Bollinger Bands
4. Fibonacci Retracements
5. Stochastic Oscillator
6. Relative Strength of Index (RSI)
7. Moving Averages (MACD)
8. Rate of Change (ROC)
9. Williams % R
10. Pivot Points
11. Momentum
12. Chaikin Oscillator and many more

Please note that basic knowledge of technical analysis is dangerous to apply as you may be missing one chart pattern while trying to locate your favorite one. Ideal time period to trade would be 3-10 months. Though some experts also try to trade on intraday basis is it not advisable. I feel since you try to make money in very little price movement in very short span of time, risk of triggering stop loss is higher than your profit making. Also make sure that the counter is very liquid meaning with high turnover.

So when next time your relationship manager/financial advisor try to sell you a story of Silver will soon hit INR 1,00,000/kg you know how to arrive at basic self opinion.

Wealthy Investments need Healthy Methods !!

Financial Plan - 1

Name: Prabhudas Mohanty,35

Resides in: Gurgaon

Profession: Planning Manager with a private firm

Net annual income (Rs 8.64 lakh)

Other details: His wife is a home maker and they are expecting their first child

Status & goals

His key goals are planning for the future of his yet to be born child, and adequate income after retirement

Needed

A financial plan that will ensure adequate funds for maintaining financial well-being and also providing for his goals

Net monthly surplus Rs 30,200

Retirement planning (2036)

Adequate monthly income after retirement

Current Investments

Life insurance cash value: Rs 6.11 lakh, Cover: Rs 59.41 lakh

EPF:           Rs 50,000

Real estate: Rs 10 lakh

Cash:          Rs 50,000

Observations

A review of his investment portfolio reveals that Prabhudas has been misguided by insurance agents. He has a heavy insurance portfolio and high property investment through purchase of land. Apart from this he has not made any other investment. His high monthly surplus is not being utilised effectively. His current financial situation is creating the risk of not meeting his life goals.

Findings

Emergency fund:         Rs 50000 maintained in savings bank account.

Health Insurance:        Rs 2 lakh from employer covering the family.

Life Insurance:            Rs 59.7 lakh

Existing Insurance:      Rs 59.7 lakh

Requirement by Human Life Method Rs 1.31 cr

Existing Investments:

Most insurance policies held are not providing adequate returns. Real estate exposure in three lands is more than required. Investments are ad hoc and hence not meeting life goals.

Recommendations

Emergency Fund: Increase emergency funds up to Rs 2.5 lakh which will cover six months expenses in any adverse situation. Invest Rs 2 lakh in money market mutual funds and keep rest in saving accounts or FD. Dispose one of your land investments to achieve this.

Express Tip: An emergency fund is created to meet uncertain expenses arising in future. It is necessary that you have adequate liquid surplus to avoid dipping into your long term savings.

Child’s education and marriage: Invest Rs 9,000 per month in SIPs for education and Rs 5,000 per month for marriage. The real estate holdings too can be utilised towards this goal. Return assumed 12 per cent p.a.

Express Tip: There are extra costs associated with child education apart from school fees, which also tend to increase. While budgeting for their expenses do take these into consideration.

Health Insurance: Buy standalone health insurance coverage to R5 lakh for the family.

Express Tip: Employer health insurance benefits are being reduced and they ceases with job change. Relying upon it completely can be risky, especially, at a higher age.

Life Insurance: A term insurance of Rs 80 lakh is recommended from any life insurance company with low premium rates and good claim settlement.

Express Tip: Life insurance is an investment, for family protection and not for capital growth. Know the right coverage required and buy the right product.

Retirement Planning: As per expense replacement method he will need a corpus of Rs 3.7 crore, to maintain his current lifestyle, post retirement. EPF can meet this goal partially if the contribution continues to grow at a good rate. To meet the remaining corpus, an investment of Rs 11,000 per month will be required assuming return of 12 per cent per anum.

Express Tip: EPF is an effective tool for retirement. To maximise it, continue your contributions till your retirement and do not withdraw funds in between.

Existing Investments: Planning your life goals through insurance is the biggest mistake. Traditional plans do not yield high returns and ULIPS have their own drawbacks. Review your insurance policies and exit ones which will not generate desired return on maturity. The savings on premium will help in buying protection cover for life insurance and health insurance, along with investments for your other goals. Real estate is a highly illiquid instrument. Dispose some of your property and utilise the proceeds for your goals through investment in other liquid instruments.

Express Tip: Asset allocation is the right approach for investments. It helps you in maintaining the right exposure to any asset class and protecting the downside during bear markets.

Conclusion

Goal based planning is the correct approach for managing your financial well-being. Identifying your goals is very important. Make provisions for emergencies first and then align your savings towards your life goals. A good asset allocation strategy will help in selecting the right instruments towards reaching financial goals.

Source – Indian Express

IFCI Long Term Infrastructure Bonds – SERIES III

Team CrawFin/ Harshal Jawale, CFP^CM

Our Assessment -

Infrastructure bonds were introduced in the last financial year by the Finance Minister to offer tax benefit on the investment of upto Rs 20,000 u/s 80CCF. IFCI is one of the oldest financial Institutions who are engaged into offering such bonds.

Coupon rate has been increased from 8% last year to 8.5% this year. Although it is not very attractive as against Bank FD (Interest rate 9.5-10%) or PPF (even maturity amount is non-taxable); it is worth due consideration for someone who is paying even Rs 500 tax after exhausting Rs 1Lkh limit u/s 80C.

The indicative yield for the option I is 8.5%, 9.65%, 10.95%, 12.44% for zero tax slab, 10% tax slab, 20% tax slab and 30% tax slab respectively. If you sell this bond post 5 years lock in period through BSE or under buyback mode, your yield will move higher. For instance if you are in 30% tax slab and goes through buyback mode after 5 years your yield will be around 16.52% pa. This happens because 30% tax benefit that you receive spreads through lesser time now i.e. 5 yrs against 10 yrs in previous case.

In my view it is a screaming buy if your tax slab is 20% or higher else you have enough options to make investment decisions safest and most favorite being Bank FD at 10% pa interest rate.

Other Details –

Deemed date of allotment – 12, December 2011

Listing – on BSE

Benefits – Tax exemption u/s 80CCF up to investment of Rs 20,000

Options	I	II	III	IV
Interest Payment	Cumulative	Annual	Cumulative	Annual
Tenor	10 yrs	10 yrs	15 yrs	15 yrs
Face Value (Rs/Bond)	Rs 5000
Issue Price	At par
Terms of Payment	Full Amount with Application
Coupon (% pa)	8.5% pa (Compounding)	8.5% pa	8.75% pa (Compounding)	8.75% pa
Coupon Payment date	At the time of redemption	12, Dec. every year	At the time of redemption	12, Dec. every year
Maturity Date	Dec. 12, 2021		Dec. 12, 2026
Buyback Option	Yes	Yes	Yes	Yes
Buyback Dates	Dec 12 of 2016 and 2018		Dec 12 of 2016 and 2018
Buyback Intimation	August 12 to September 11 of  years 2016 and 2018		August 12 to September 11 of  years 2016 and 2018
Redemption Amt (Rs/Bond)	11305/-	5000/-	17596/-	5000/-
Redemption Amount if buyback exercised (Amount in Rs)
End of year 5	7519/-	5000/-	NA	NA
End of year 7	8851/-	5000/-	8995/-	5000/-
End of year 10	NA	NA	11569/-	5000/-
End of year 12	NA	NA	13682/-	5000/-
Lock-in Period	5 years from deemed date of allotment